Articles

Nevada Overhauls Construction Defect Laws For Residential Construction

INTRODUCTION

Nevada’s construction defect laws – primarily NRS 40.600 et seq. -- have long been regarded as one (if not the) most plaintiff-friendly laws when seeking recovery for construction defects in residential construction. Plaintiff attorneys were virtually guaranteed recovery of their attorney fees, costs and expert costs which often far exceeded the actual cost to repair the alleged defect. NRS 40.600 et seq. also liberally defined what constituted a “constructional defect” and NRS 116.3102 granted homeowner associations standing to pursue claims on behalf of its unit owners. Moreover, a claimant could bring an action up to 12 years after substantial completion of an improvement and only had to provide minimal notice of the alleged deficiencies. For over a decade, multiple efforts to revise many of these statutory provisions failed.

For the first time in decades, Republicans swept to victory in the November 2014 election and gained control of the Nevada Legislature. As a result, combined with a Governor who identified construction defect reform as a “top priority”, changes to Nevada construction defect laws were inevitable. With lighting speed (e.g. it was the first bill signed by the Governor during the 2015 legislative session) AB 125 made sweeping changes to NRS 40.600 et seq. and other statutes effective February 24, 2015.

Under Nevada’s construction defect laws generally, before a homeowner can commence a civil action against a contractor, subcontractor, supplier or design professional for constructional defects, the homeowner must comply with certain pre-litigation requirements including providing notice of the defect to the contractor. Once notice issues to a contractor, it has 30 (after the date on which the contractor receives the notice), to forward the notice to all subcontractors, suppliers or design professionals associated with the construction of the residence or appurtenance. Subcontractors, suppliers and design professionals receiving the notice are required to inspect the alleged constructional defect and may elect to perform repairs. See NRS 40.645, 40.646, 40.647.

While NRS 40.600 et seq. and other statutes continue to provide a framework for actions involving claims for constructional defects, AB 125 significantly changed many provisions which will likely have a far reaching impact on construction defect litigation in Nevada. Some of the most significant changes are highlighted below.


SIGNIFICANT REVISIONS

Definition of “Constructional Defect”

Revisions to the definition of what constitutes a “constructional defect” represent one of the most significant changes. Under the prior law, a “claimant” simply had to establish the design, construction, manufacture, repair or landscaping of a new residence, or an alteration of or addition to an existing residence or appurtenance was: (1) done in violation of law including local codes or ordinances, (2) which proximately causes damage, (3) not completed in a good and workmanlike manner in accordance with industry standards, or (4) which represents an unreasonable risk of injury. Under this definition, a claimant could recover for “technical violations” without a showing of actual damage.

Under the new law, “constructional defect” is now defined as: (1) there is an unreasonable risk of injury to a person or property, or (2) the work or design was not completed in a good and workmanlike manner and proximately causes damage. [Emphasis added]. As a result, establishing that certain work or services was not performed in a good and workmanlike manner is no longer sufficient. A claimant must now establish it caused actual damage or it created an unreasonable risk of injury to a person or property. See NRS 40.615.

Recoverable Damages

Under NRS 40.655 in the prior statute, a claimant could recover a variety of damages including reasonable attorney’s fees and costs and expert fees and costs related to the investigation of the allegedly defective conditions. Courts generally awarded all the attorneys fees, costs and expert costs claimed by the claimant. As a result, Plaintiff’s attorneys were incentivized to bring questionable claims with little or no risk. It was not uncommon for the attorney fees and expert costs in a case to far exceed the cost of repair damages claimed by a claimant. This often resulted in absurd results when a subcontractor or design professional evaluated their potential damages exposure.

As revised, NRS 40.655 no longer expressly permits the recovery of attorney fees.1 Moreover, it limits the recovery of expert costs to the costs incurred related to constructional defects proven by the claimant. Also, NRS 40.655 clarifies that compliance with NRS 40.600 et seq. limits a claimant’s recovery to the damages enumerated in NRS 40.655. The revisions to NRS 40.655 are significant inasmuch as spurious claims will likely be avoided for fear that attorney fees and expert costs may no longer be automatically recoverable.

Notice Requirements

AB 125 substantially changed what a claimant must include in its notice to the contractor prior to commencing litigation. As revised, NRS 40.645 requires the notice to:

  • State in specific detail, rather than in reasonable detail, each defect, damage and injury to each residence or appurtenance that is subject to the notice;
  • State the exact location of each defect, damage and injury, rather than describe in reasonable detail the location of the defect; and
  • Include a statement signed by the owner of the residence or appurtenance in the notice that the owner verifies that each defect, damage and injury exists in the residence or appurtenance.

Under the prior statute, many attorneys for claimants issued vague, non-descript notices of alleged defects with little or no specificity. As a result, it was difficult, if not impossible, to determine whether repairs were warranted. Revisions to NRS 40.645 represent a clear intent by the legislature to force claimants to provide more detailed and verified notices. Moreover, the issuance of one notice on behalf of similarly situated homeowners of residences or appurtenances within a single development allegedly having common defects is no longer permitted.


Other Significant Changes

  • NRS 11.202 was revised to provide a statute of repose of six (6) years after substantial completion for all actions for damages caused by a deficiency in construction, planning or design of an improvement. As such, the new statute effectively eliminates the prior distinction of limitation of actions for patent defects (6 years), latent defects (8 years) and known defects (10) years and eliminates prior provisions permitting a claimant to bring a claim within 2 years of the injury if the injury was discovered in the last year. The new statute of repose applies retroactively to actions in which substantial completion of the improvement occurred before February 24, 2015.
  • NRS 116.3102 previously provided that a homeowners’ association could initiate or defend litigation in the name of the association and on behalf of two or more homeowners.2 AB 125 revised NRS 116.3102 whereby an association may not pursue a constructional defect claim on behalf of itself or homeowners, unless the claim pertains to the common elements of the association.
  • A claimant must first submit a claim under the homeowner’s warranty and the insurer must deny the claim prior to issuing a notice pursuant to NRS 40.645. The notice may only include those alleged defects denied by the insurer. See NRS 40.650(3)(a). The statutes of limitation or repose are tolled from the time the claimant submits a claim under the homeowner’s warranty until 30 days after the insurer denies the claim. See NRS 40.650(3)(d).
  • The revised statute creates circumstances whereby a residential construction contract that requires a subcontractor to indemnify or hold harmless other parties is void and unenforceable. In addition, the statute contains provisions and changes to the law, including:
    • When a subcontractor’s duty to defend arises;
    • The manner in which a party may pursue indemnification from a subcontractor; and
    • When consolidated insurance programs covering two or more contractors or subcontractors for work and defects associated with construction.

Interestingly, only subcontractors are specifically referenced when defining the parameters of the enforceability of a contractual duty to defend and indemnify. “Design professionals” and “suppliers” are noticeably absent from this portion of the statute.

  • Under Nevada law, parties in a civil action can agree to have a judgment entered against them pursuant to an offer of judgment, and under such circumstances, the prevailing party was not awarded costs or attorney’s fees if the prevailing party fails to obtain a more favorable judgment at trial. See NRS 17.115; N.R.C.P. 68. Changes to existing law provide a similar procedure allowing parties that have given notice of constructional defect to a contractor, subcontractor, supplier or design professional the opportunity to have a judgment entered against them before a civil action on constructional defect.
  • The revised statute requires a claimant and an expert who provided an opinion concerning constructional defects, to: (1) be present when a contractor, subcontractor, supplier or design professional conducts the required inspection of the alleged defect; and (2) identify the exact location of the alleged defect. See NRS 40.647(b).
  • Previously, statutes of limitation and repose were tolled from the time that a claimant gave notice of a claim for constructional defects until 30 days after the mandatory mediation. The revised statute mandates the period for which the statutes of limitation and repose are tolled may not exceed one year. Under this section, the court may extend the tolling period if the homeowner demonstrates good cause. See NRS 40.695(2).


CONCLUSION

For over a decade, NRS 40.600 et seq.’s statutory framework heavily favored claimants seeking recovery for constructional defects in residential construction. The pendulum has now swung in the opposite direction with the passage of AB 125. It will now be much more difficult for a claimant to maintain a claim for constructional defects given the increased notice requirements, the removal of attorney fees as damages, a shortened statute of repose and limiting the standing of a homeowners association. In the short term, this will likely have a chilling effect on the number of claims -- at least until the next legislative session in 2017.

 

1While the current version of NRS 40.655 no longer expressly provides for the recovery of attorneys fees, Plaintiff’s attorneys will likely argue NRS 40.655(e) permits the recover of attorney fees as an “additional cost”. NRS 40.655(e) permits recovery of “any additional costs reasonably incurred by the claimant, for constructional
2In D.R. Horton, Inc. v. Eighth Judicial District Court, 125 Nev. 449 (2009), the Nevada Supreme Court held a homeowners’ association could pursue constructional defect claims on behalf of homeowners with regard to constructional defects in individual homes.

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